Scenes from a merger (full transcript)

This is the complete version of the column that appeared in print on Jan. 17, 2005.

The transient career of the modern worker has been well-chronicled. Employees leave their companies at a rate unimagined by previous generations. But what happens when a company leaves its workers?

MGM’s sale to a consortium headed by Sony was approved in mid-December by company shareholders; European regulators are now reviewing the transaction. Daily Variety sought out Chris McGurk, the Lion’s vice chairman and chief operating officer, to discuss, among other topics, what it’s like to work at the studio during this time of change.

Q: We’ll start with some easy ones. Where will you be working this time next year?

A: I have no idea. What the entire MGM team is focused on right now is maximizing the business until the deal closes sometime in 2005. It’s a testament to the employee team we put together here that everybody remains focused like a laser beam on trying to go out on a high note, maximizing all the opportunities that we have with our film slate, our TV shows, and with the library. We’ve got a great team in place that knows how to generate profits and do the right thing for the shareholders.

Q: How did the MGM work force respond to the rumors and then the announcement of the sale?

A: Clearly, all the talk of the sale along with Warner Bros.’ and Sony’s interest was a distraction over the last year. It’s reflective of the great people that we have in place at this company that, through it all — through all the discussions and everything — they remained remarkably focused on their jobs.

We had a great year financially in 2004 — all the financial parameters. While all the talk was going on in the press, people focused on what they could control, which was doing their jobs, keeping their nose down, making great movies and releasing them in a smart way and focusing on all the things that we do in a very innovative way to maximize the value of our library here, which we think sets us apart from the other studios. They’ve remained very, very focused. Alex [Yemenidjian, MGM’s chairman and CEO] and I have been extraordinarily proud of how the employee team has continued to operate and focus over this difficult period, but it is kind of a bittersweet time. While we’re extremely gratified by the strong lineup of movies that everybody’s put together and the television shows that we have in place — from “Hotel Rwanda,” to “Be Cool,” “The Pink Panther,” the Bond movie that we are working on, “Stargate Atlantis” and all the great things our home entertainment group does, it seems like every month they break another record or get another award — as we look forward, in six months or so the deal’s going to happen.

Q: The various decisions that are made in the interim period — are you pretty free to do what you want? Or are you mindful of the eventual buyer is looking over your shoulder?

A: We have the freedom to operate with minimal covenants, so it is, to the extent possible, business as usual. We’re greenlighting movies. We’re releasing movies. Again, everybody’s focused on trying to make everything we do as successful as possible and going out on a very high note.

Q: What are the human resource mechanics of such an enormous transaction? Then, of course, the delicate question: Who decides which executives and staff members will be offered positions with the new consortium and who won’t?

A: I can’t comment on that directly, because it’s an area where the Sony consortium will be making the decisions. But Alex and I truly believe we have great employees here who would be extremely attractive employment candidates either for the newly configured MGM or any other company looking for very smart, talented workers with a proven track record of success.

And if people aren’t kept on, we feel very good about the fact that even before the negotiations got serious, we created what we thing is a very broad and generous employee security plan that touches every single employee of MGM. We believe that the plan ensures they’ll have a significant financial cushion before they figure out what their next step is. I don’t know of any company in Hollywood or the entertainment business that’s had a security program — that’s what we like to call it — as broad, as deep and as generous as the one we put together.

It’s also important to remember that every employee of MGM is a shareholder in the company, and a significant number of employees have what we thing are very competitive stock option programs. Over the period that Alex and I have been in place here, our stock has gone up 44%, which we’re very proud of, because that’s really our ultimate scorecard and that’s about seven times … a little over seven times the rate of growth of the Dow Jones Index over that period. It’s certainly higher than any of the other entertainment companies.

So between the security program, the stock appreciation, and also the fact that everybody here is going to be leaving after a period of enormous success and the fact that they can leave with their heads held very high, we think all that’s going to stand the employees in good stead as they look for other opportunities.

Q: What do you advise employees when they find themselves in a situation where their company is in the process of being acquired? What kind of behavior and/or characteristics will be valued by the acquiring company? And what kind of actions or not will stand an employee and/or and executive in good stead in situations like this?

A: I think the same characteristics are important — this is interesting — in terms of employer/executive behavior. The success attributes?

Q: Yes. Exactly.

A: When Alex and I started to build the staff at MGM, we looked for team-oriented people who could operate in a very idea-generating environment, where people were free to communicate ideas and who really wanted to work in an extremely non-political atmosphere, where the focus was on the assets of the company, the products we were creating, and results.

We created a set of core values, some of them that I just described, that really drive the company. When we hired people we really looked for people who reflected those values and would work with them in mind. We really feel that between the people we hired and the kind of very communicative, idea-generating, non-political environment that everyone helped us create, we really have a team of results-oriented nines and tens in place here.

I think that’s really helped deal with all the issues they’ve had to deal with in the last year. Alex and I believe they’ve all preformed magnificently.

Q: You’ve worked for some wonderful companies: Disney, Universal, MGM, and PepsiCo. How does an entertainment business executive woo an executive from a rival company? Is it anything goes? Or is there some sort of established protocol?

A: One of those issues you have to deal with in this business is that almost every senior executive, and certainly every good senior executive, is operating under an employment contract. We would never do anything to violate the terms of anybody’s employment agreement.

Over time, what you do to attract good people is to make your company a great place to work with a great work environment where someone feels they can thrive. The way to do it that is to build a team-oriented environment where people know they can succeed based on merit — in a non-political environment — and where they know that they can put any idea forth as long as it’s done in the spirit of creating value.

If you create that kind of warm, idea-generating, team-oriented, communicative environment, you can attract the kind of talented people you want. I think we’ve done a pretty good job of doing that here. It’s probably the biggest part of the reason why we’ve been successful in the last five years: we created that environment and hired the best people.

Q: Speaking of Alex, and referring to management style, Mr. Yemenidji
an was quoted in the New York Times saying, ” I don’t believe in democracy. I believe in a benevolent dictatorship.” Do you agree with him?

A: Whether it’s a soft drink company or a meat-packing business or a Hollywood studio, when you run a company, you’re paid to make tough decisions at the end of the day. Again, Alex and I have really focused here at MGM on trying to create the kind of environment that encourages the employees and the key executives to put forth fresh ideas, to communicate, to put as much information on the table before a decision is made, for two reasons: One, to make sure that everybody feels they’re part of the decision-making process and their voice has been heard; and two, to get every piece of critical information and every fresh idea on the table before the ultimate decision has to be made.

That’s the environment that we’ve had here, and I think that everyone in this company feels that they’ve had a voice and they could say almost anything as long as it was done in the spirit of moving the business ahead. Ultimately, the people running the company have to make the tough calls and the tough decisions. But we do it with our eyes open, really well informed, and beneficiaries of as many good new ideas as possible.

Q: In terms of management style and/or corporate culture, how are these four successful and very intriguing companies alike and how are they different?

A: Boy, that’s a tough question!

Q: It’s probably a subject for a thesis. But just give me a thumbnail sketch.

A: It is the subject for a thesis. All of those companies are great branded businesses. A large part of their success as been successfully taking that brand and leveraging it in smart, new, innovative ways. Whether it’s Universal or Disney or Miramax or Pepsi or MGM — it’s all about taking that brand and working behind it to maximize value. They’re dissimilar in the fact that the cultures of all of them are very, very different.

Q: What are you most proud of?

A: Alex and I took a company that had lost money for, I think it was 42 or 44 straight quarters. We lost track. It was in real turmoil, morale was low and the stock price was in the toilet. If you look at it by any objective measure, the company was a complete turnaround in the last five years, on every financial parameter.

We also proved the point that by focusing on library management you could really put yourself on very sound footing in this business. We more than tripled the cash flow of our library in the time that we were here, and that enabled us to be smarter and more disciplined about what we were doing in the new film and the new TV arena, and in everything that we did in the library. What the management did here with the library, over time, stands out.

The fact that we helped in working with the “Bond” producers to reinvigorate the “Bond” franchise, which is stronger than it’s ever been after 40 years, is an accomplishment worth noting. Everything we did with United Artists, in terms of redefining United Artists and using it as a platform to bring films with a social conscience to audiences, whether it’s “Bowling for Columbine,” or “Hotel Rwanda,” or “No Man’s Land,” or “Osama,” is something we are really proud of.

But above all that, Alex and I are most proud of working to assemble the employee team that we have here at this company and working with them to create an environment that has helped lead to the success of the company in the last five years. It really is all about the people here, and they’ve just done a great job.

Q: As Hollywood “outsiders” investing in the movie industry, there’s an old vaudeville routine: “Do you know how to make a small fortune in Hollywood? Start with a large one!” Is there any truth to that? And if it’s true and you still want to invest, how can you possibly win?

A: There is some truth to it. Clearly, there have been a lot of people who have come here and have lost a lot of money. But if you come to this town and you operate with people who have a plan and address the business in a financially disciplined way, you can generate strong and sustainable returns and profits in this business.

The example, again, is anyone who invested in MGM when Alex came on board. We assembled the management team who generated a return that’s more that seven times the Dow Jones Industrial Average during that period, which is far ahead of all the other entertainment companies over that period.

They were investing behind a financially disciplined management team that had a plan and really built the entire company — hiring employees, setting up incentive systems, etc. — behind that plan, and executed it in a consistent way over that period of time. So you can make money in this business, and you can make money in this business in a big way. But it’s about being careful and disciplined in your approach.

Q: MGM was the closest thing to what they call in business a “pure play.” If you had to do it over again, would you have remained as pure as you were? Or would you have tried to get a little more active?

A: We made no secret of the fact that we were trying to get bigger in a smart way, that we looked to vertically integrate, we looked to diversify our streams of income. There were a couple of initiatives over the last few years where we tried to get bigger in a smart way, in a way which we could control the combined entity.

The foremost example of that was Vivendi Universal. So, clearly, that was part of our strategy. The point was, after the Vivendi Universal deal we looked around the landscape and there wasn’t really an opportunity to acquire at that point. To combine in a smart way and get bigger, that would benefit our shareholders in a dramatically positive way, was really the only alternative.

Q: Getting back to employees. When it comes to treating employees well, what does Hollywood do best? And where could it improve?

A: The best thing about Hollywood is that it truly is a meritocracy. If you can create great art or create great commerce, you can be extremely successful regardless of what your background is, where you started, or who you know. This town has lots of people in senior positions, who started in the mailroom or sold used cars a few years ago.

This town really is, in a lot of ways, the American dream. The worst part is that sometimes, in some corporate environments, or some studios, employees can feel like second or third-class citizens if they’re not working directly on the latest creative property, whether it’s a film or a TV show.

People in this town can feel marginalized if they’re not at the top of someone’s idea of what the creative food chain is. We’ve worked really hard to make sure everyone at MGM knows that there’s no “B” team or “C” team. They’re all on the “A” team here, whether they’re making movies or working in the financial organization or working on our library.

At MGM the library and all of our distribution operations are just as important as the new film operation, and everybody here on the team knows it. There’s only one “A” team. That’s one of the reasons why that kind of non-political, no second-class citizen, we all know why we come and work every day and what we have to do.

That’s what’s helped make us successful. And then, we’ve set up our incentive plans and everything else so that everybody has a stake in the company’s overall success. We keep over-communicating what success means here and reinforcing that idea that everyone in the company is just as important as everybody else in contributing to our success.

Q: How much of your activities, or MGM’s activities … maybe another way of putting is: In which sectors of MGM businesses do you see the greatest growth opportunities? And how important is international, in terms of that growth?

A: For growth, the new area of new technology. There’s still continued growth in DVD including the whole next generation of HD-DVDs. There’s a whole new wave for companies to exploit, both with their new product and through the
ir libraries. Internationally, there’s still tremendous room to grow in the ancillary markets.

Even DVD penetration overseas is, in most countries, only at about half the level of the U.S. right now. So there is more room for growth internationally. For MGM specifically, we’ve done a very good job internationally of growing our channel business. We’re in more than a 110territories now with MGM channels. Domestically, that’s an area of opportunity still for the MGM brand. And I think there’s still a lot of growth potential in the channel business, particularly when combined with all the vendor technology such as HD channels.

Q: What’s your tolerance for the failure of a member of your team?

A: Mistakes are part of the process. They’re part of management. As I said, we’ve tried to create an environment that is non-political. Everyone feels that they have a voice, and you don’t get penalized for putting a foolish idea out there or making a mistake as long it is was done with the right intent and the right mindset, which is creating value for the organization.

A big part of being a good leader is to own up to your own mistakes, A, and, B, to not be afraid to look foolish in the pursuit of new ideas that are going to move the business ahead.

Alex and I had a lot of conversations about it. We both put forth ideas out there that we both look at each other after, you know, when I’ve said something and Alex will look at me, knowing that it was probably the stupidest thing ever … ever! But part of it is done, really, to help create an environment where nobody feels foolish in throwing something out there. Because of if the boss isn’t afraid to look stupid … then why should you be?

Q: What kinds of errors are unforgivable, from your perspective?

A: When they’re done for political reasons. When the reason that someone got himself into the fix is because he was doing something to advance his or her own career at the expense of the company, and they weren’t done in the spirit of creating value.

Q: A, you’re in a very interesting position in that you have been already a senior executive at a number of the top, almost iconic studios in the entertainment business. In the process you’ve made yourself a student of the industry. They always talk about Hollywood’s Golden Age. Do you think that there’s a Platinum Age to follow the Golden Age?

A: I would certainly hope so. One of the things that’s so encouraging about this business is that it attracts really brilliant, creative people. The caliber of executives and the filmmakers, just their general smarts, and the innovation that comes out of the people in this industry are just amazing!

Given the fact that this is a business that attracts those kinds of people, like Pixar with Steve Jobs and John Lasseter and what they’ve created in the last 10 years. You have to an optimist that things are going to continue to get better both creatively and artistically. There have been some great movies over the last few years and I hope it continues. We’re all very gratified that just yesterday we got five Golden Globe nominations, including three for the “Hotel Rwanda.”

Q: Congratulations! So does this bode well for the kinds of movies that MGM will continue to produce?

A: I think it bodes well for United Artists and what we’ve tried to accomplish there with a movie like “Hotel Rwanda.” It’s a movie that a lot of other production companies and studios didn’t want to get involved in. We’ve made it a real point to try and tackle important, socially conscious, and thoughtful films that can have a meaningful impact on people’s lives, which is the great part of being in this business.

You can impact people’s lives and have an impact on the popular culture. Over the past four years at MGM and United Artists we did “No Man’s Land,” about the Bosnian war, “Bowling for Columbine,” about the culture of gun violence, “Osama,” about the plight of women under the Taliban regime in Afghanistan, and now “Hotel Rwanda,” all of which have received a lot of recognition and we think deserved every bit of it. These are films that make a difference, and every single person at MGM and United Artists is extremely proud to be associated with them.

Q: It’s wonderful and also a bit ironic, given some ancient MGM history. Louis B. Mayer once was quoted as saying, “If I want to send a message [referring to a motion picture] I’ll call Western Union.” But it sounds as if you can send a [cracks up] …

A: So we turned the company on its head and spent much of the first year rebuilding the team with great people who could meet pretty high standards. And we think it’s paid off. We’ve had huge success in the market. It’s attributable to shaking things up at the beginning, bringing in the best people and then creating an environment and lettin’ ‘em go. The team’s performed magnificently.